Police raided the accounting offices of Ernst & Young in Hong Kong in 2000 to gather evidence about the audit work done in related to Akai Holdings Ltd, anelectronics maker. Akai filed for bankruptcy in 2000 with $1.8 billion of debt on its books, the largest bankruptcy filing in the city at that time. The raid had been made due to a request from the bankruptcy trustee, Bondi Walsh. Walsh stated that the accounting firm had been negligent in the performance of the audit and the negligence had led to substantial losses for Akai. Walsh alleged that information in the work papers had been forged during the audit process. Edmund Dung, the manager on the audit engagement was fired by Ernst & Young after being suspected of forgery in preparing audit work papers. Ernst & Young settled Walsh’s claim against the audit finn for a “substantial” amount of money? Required: a. Discuss the accounting and ethical problems if an auditor prepares forged audit documents. b. What principles in the AICPA and the international code of conduct were violated by the forgery? c. What rules in the AICPA and the international code of conduct were violated by the forgery? d. Was the bankruptcy trustee right to file a suit against the accounting finn for negligence in the audit? Was the audit firm justified in firing Dung?
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